PART B: PROVISIONS

Topic Notes IFRS Ref

Scope applies to all provisions other than those that a) result from executory IFRS 142
37
contracts except from onerous contracts b) are covered by another
standard (Construction contracts IAS 11 and Leases IFRs 17)

Definition of Provision liability of uncertain timing or amount' IFRS

37 p
10

3.4 Recognition of Provisions a) an entity has a present obligation (legal or constructive) as a result IAS 37 143
para
of a past event 14

b) it is probable that an outflow of resources embodying economic

benefits will be required to settle the obligation
c) amount of obligation can be estimated reliably
Characteristics
past event is deemed to give rise to a present obligation if, taking
IAS 37
a) Present obligation account of all available evidence, it is more likely than not that a para
present obligation exists at the end of the reporting period 15 144
Obligation
a duty or responsibility that an entity has no practical ability to avoid
IAS 37
Legal Obligation para
1) Duty or responsibility 17 144
2) Legally enforceable (contractual or statutory)
3) Third party is owed
4) No realistic alternative
Constructive Obligation IAS 37
1) Accepts responsibilities by way of: a) past practice; b) published para
policies; c) specific current statement 10 144
2) Valid expectation
IAS 37
b) Probable outflow of the probability that the event will occur is greater than the probability para
Economic Benefits that it will not 23
- Past claims indicate probability and his agent's past experience
provides grounds to for reliable measurement

IAS 37
a provision is considered to be capable of being reliably measured even para
c) Reliable measurement if a number of possible outcomes exist 14

Difficulty in estimating the amount of provision under conditions of

significant uncertainty, does not justify non-recognition of the provision

3.5 Measurement of Provisions the amount recognised as a provision shall be the best estimate of the IAS 37 145
para
expenditure required to settle the present obligation at the end of the 36
reporting period
Best estimate the amount that an entity would rationally pay either to settle the IAS 37
para
obligation at that date or to transfer it to a third party at that time 40

IAS 37
para
- method used when provision being measured involves a large
39
Expected Value population of items
IAS 37
para
- method used when provision being measured involves single
37
Most likely outcome obligation
- method used where there is a continuous possible outcomes and
Mid-point range each point in that range is as likely as any other
 Discounting where the effect of the time value of money is material , the amount of IAS 37 146
para
a provision shall be the present value of the expenditures expected to 45
be required to settle the obligation
Discount rate should be: a) pretax; b) reflects current market assessments; and c) IAS 37
para
risks specific to the liability 47

shall not reflect the risk for which the future cash flow estimates have
been adjusted

3.6 Disclosures See page 147 147

-use of provisions to manipulate revenue and expense (See page 147
Earnings Management and page 488)
Exemptions reliefe from compliance with requirements: 149
disclosure of some or all of the information required . . . can be
expected to prejudice seriously the position of the entity in a dispute
with other parties on the subject matter of the provision, contingent
liability or contingent asset
Refer to page 149 for further explanation

3.7 Provisions and Professional Judgement